Have you save enough for your retirement? This is a question that keeps many people awake into the wee hours of the morning. That is not surprising at all.
Firstly, retirement is so well out there in the future that envisaging what may be needed in the retirement phase is an issue. For many people, retirement is so far out that they cannot even visualize them retiring!
Secondly, retirement planning and investment for it is a default. What is left after meeting all the various expenses and goals, if there is, goes into retirement kitty! But even what goes into the “retirement kitty” gets used over time for other goals from home purchase to vacations. Hence, the only ones that may be left at retirement maybe the Employee PF, PPF, Gratuity & some other retiral benefits.
Even with EPF & PPF we have seen that people dip into this for their goals and expenses, along the way. Hence, the balances here is not as good as it should have been.
Thirdly, most people are not able to envisage what their expenses will be at retirement. Nor how long they will live in their retirement. Along with that the world has become a lot more uncertain and the concept of job security is all but out, except in some government jobs.
Still, let us try to address what needs to be done knowing that these limitations exist.
There is a section of the population, maybe small in comparison with the entire population of the country, that works for government & PSUs. Many of them will get pensions for life and to a reduced extent for the lifetime of the spouse. Also, most of them enjoy lifetime medical benefit, though there are certain limits in some cases.
These people mostly need not worry too much about retirement for the pensions would take care of monthly expenses and pensions themselves will keep going up over the years. This was for those who joined these institutions before 2004. The Government understood the limitations of funding ever increasing pensions, especially in a time of increasing life expectancy. Hence, those who have joined after 2004, the pensions are based on contribution rather than based on the last salary drawn.
Now, let us look at the average citizen who does not enjoy these privileges and see how we can go about estimating & planning for retirement.
The first thing one needs to have in retirement is a proper medical insurance policy. A medical contingency provision also needs to be estimated and provided to cover those situations which may not be covered by a medical policy ( eg. Home nursing needs or critical illness treatments that would go well beyond the medical policy cover ).
Let us now estimate what kind of money is needed while retiring to live a well-funded life. For that, you need to look at expense heads that will still be there at retirement like groceries, provisions, utility bills etc. Some like conveyance will be there but at a lower level. Some expenses like children’s education expenses will not be there at all. Also, loans would have been paid off.
Now estimate the expenses as per today’s prices assuming one is retiring today, considering the above points. Assume an inflation of 7% throughout and calculate what the expenses will be at retirement. The formula is Expenses *(1.07^n). n is the number of years to retirement.
Normally, it is seen that expenses in retirement drops overall by 20-25%. Reduce the expense figure obtained earlier by say 20%. That will be the approximate expense every month. There could be other expenses like holidays, home and vehicle maintenance, insurance premiums and others. Again, do a similar calculation and see what the expenses at retirement are. You need not bring this down, like in the case of monthly expenses.
Next, we need an estimate of one’s life expectancy. It makes sense to err on the side of caution here. Let us say, the couple will have a life expectancy of 30 years after retirement.
We need to calculate what should be the corpus, assuming inflation, regular drawdown for expenses as also a return from the investments that one has deployed and arrive at an amount we need to have at retirement. There are calculators available to help on this over the internet and you may use them.
Once you arrive at that number, we need to see what we already have today as investments ( which would include PPF, EPF, NPS, Mutual Funds etc. that are earmarked for retirement ) and what we need to save regularly to arrive at the number. Again, the saving potential can go up along the way as the salary increases. These things have to be taken into account too.
These calculations may not be that easy. However, there are calculators available on the net to help you here too.
The thing to remember as far as retirement is that the time in retirement for most people is very long. We cannot afford to caught underfunded in this phase as going back to work is not an option. Hence, we need to be disciplined and consistent about the investments for retirement and need to increase allocations as salary increases, across the years.
Investments like PPF, EPF, NPS etc. are suitable for accumulating a retirement corpus. One may use other investment options like NCDs, Bonds, Mutual Funds etc. also to invest for retirement. Apart from this, one may invest in equity-oriented assets, property assets etc. too to grow the wealth rapidly and get to the desired figure at retirement.
Now if all this sounds like a lot of work and seems difficult to figure out, just consult a good financial planner, just like you would consult a doctor for medical needs. Retirement planning is very important. It cannot be left to chance.
(The author is Managing Director & CEO at Ladder7 Wealth Planners; views expressed are personal)
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